Analysis & Opinion

PRAGUE (Reuters) - The Czech government must change tack to help the economy out of a recession and "stop scaring" the public with further budget tightening, Prime Minister Petr Necas was quoted as saying on Saturday.

Pressure has been building on his centre-right cabinet to ease its austerity zeal after the economy slid into a recession and Necas's Civic Democrats suffered a drubbing in regional and Senate election last month as voters punished them for spending cuts and sleaze scandals.

"We have to stop all the scaring of people and show them a light at the end of the tunnel," daily Mlada Fronta Dnes quoted Necas as saying.

He said the government should back off from pursuing tough deficit targets while the economy remains weak.

This is the first time Necas has said the cabinet must alter its policy focused primarily on trimming debt, although he stopped short of admitting what many economists have said, that the government's stubborn fiscal cuts significantly contributed to the three-quarters old economic recession.

Government spokesman Jakub Stadler said the remarks were Necas's personal opinion which he will discuss with the rest of the government and it was not yet decided what the new deficit targets will be.

The Czech central bank cut its main policy rate to near zero to spur spending and central banker Pavel Rezabek took a rare swipe at the government in a Reuters interview last month, saying it should stop undermining the bank's efforts to drag the economy out of recession.

Necas said poor demand was a "psychological matter", meaning people and businesses constantly hearing of plans for budget cuts and economic crisis in the euro zone prefer to stash money in their bank accounts in anticipation of bad times ahead rather than spend and invest.

"Ministers should not longer scare people but they should give them hope... because the government's consolidation effort has brought results," the paper quoted him as saying.

He said what the economy needed now was a slowdown in the government's fiscal consolidation efforts.

The government will now ease off on its plans to cut the public sector deficit, after it has managed to slash it significantly to 3.3 percent of gross domestic product (GDP) last year from 5.8 percent in 2009, he said.

While it had been planning to trim the gap further to 2.9 percent of GDP in 2013 from an expected 3.2 percent this year, and to 2.5 percent in 2014 and 1.6 percent in 2015, Necas told the paper the government should now make do with keeping the deficit below 3 percent in those years.

"When economic growth is at around 2 percent, it will again possible to return to lowering budget deficits," the paper quoted him as saying.

Necas's fragile coalition government warded off collapse last week, surviving a vote of confidence after quelling a rebellion among Necas's Civic Democrats against another series of tax hikes that it pushed through the lower house.

Two years of concerted effort by the administration to reduce debt has helped Czechs cut bond yields, or costs the country pays for borrowing money, to record lows.

The yield on the ten-year paper was 1.908/810 on Friday below levels of many euro zone member states, including for example Belgium's 2.342/268 on a corresponding bond.

But it has made Necas's cabinet extremely unpopular and his Civic Democrats suffered a bitter defeat in both regional and Senate elections last month.

The austerity drive also took its toll on economic growth as a plunge in government and household consumption caused the economy to contract every quarter since the final three months of 2011, while others in the region, such as neighboring Poland and Austria, grew.